<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-3880
TOM BROWN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1949781
------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
P. O. BOX 2608
500 EMPIRE PLAZA BLDG.
MIDLAND, TEXAS 79701
---------------------------------------- ---------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
915-682-9715
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 10, 1999.
CLASS OF COMMON STOCK OUTSTANDING AT AUGUST 10, 1999
--------------------- ------------------------------
$.10 PAR VALUE 29,347,489
<PAGE> 2
TOM BROWN, INC. AND SUBSIDIARIES
QUARTERLY REPORT FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Part I. Item 1. Financial Information (Unaudited):
Consolidated Balance Sheets,
June 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations,
Three and Six Months ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows,
Six Months ended June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 18
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
2
<PAGE> 3
TOM BROWN, INC.
P. O. Box 2608
500 Empire Plaza Bldg.
Midland, Texas 79701
----------------------
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FORM 10-Q
-----------------------
PART I OF TWO PARTS
FINANCIAL INFORMATION
3
<PAGE> 4
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,662 $ 2,670
Accounts receivable 30,962 32,390
Inventories 585 532
Deferred income taxes 4,535 8,585
Other 748 260
-------- --------
Total current assets 41,492 44,437
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Oil and gas properties, based on the successful
efforts accounting method 402,351 387,336
Gas gathering and processing and other plant 53,337 51,561
Other equipment 21,542 20,340
-------- --------
Total property and equipment 477,230 459,237
Less: Accumulated depreciation, depletion and amortization 113,292 92,232
-------- --------
Net property and equipment 363,938 367,005
-------- --------
OTHER ASSETS:
Deferred income taxes, net 28,877 23,429
Other assets, net 7,329 7,011
-------- --------
Total other assets 36,206 30,440
-------- --------
$441,636 $441,882
======== ========
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 16,521 $ 23,124
Accrued expenses 6,743 4,754
Advances from gas purchasers 12,957 24,529
--------- ---------
Total current liabilities 36,221 52,407
--------- ---------
BANK DEBT 74,000 55,000
--------- ---------
OTHER NON-CURRENT LIABILITIES 2,670 2,725
--------- ---------
STOCKHOLDERS' EQUITY:
Convertible preferred stock,
at $.10 par value. Authorized 2,500,000 shares;
Outstanding 1,000,000 shares with a liquidation
preference of $25,000,000 100 100
Common stock, at $.10 par value
Authorized 55,000,000 shares;
Outstanding 29,344,489 and
29,259,989 shares, respectively 2,934 2,926
Additional paid-in capital 432,036 431,082
Accumulated deficit (106,325) (102,358)
--------- ---------
Total stockholders' equity 328,745 331,750
--------- ---------
$ 441,636 $ 441,882
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Gas and oil sales $ 20,838 $ 21,099 $ 38,417 $ 40,692
Marketing, gathering and processing 13,705 10,634 26,178 21,646
Drilling 1,096 642 2,152 1,836
Interest income and other 759 269 1,164 430
-------- -------- -------- --------
Total revenues 36,398 32,644 67,911 64,604
-------- -------- -------- --------
Costs and expenses:
Gas and oil production 3,493 3,289 7,423 7,058
Taxes on gas and oil production 2,223 2,419 3,989 4,265
Cost of gas sold 13,805 10,073 25,767 20,432
Drilling operations 903 507 1,900 1,483
Exploration costs 1,257 4,043 3,246 7,678
Impairments of leasehold costs 900 750 1,800 1,715
General and administrative 2,437 1,476 3,908 3,882
Depreciation, depletion and amortization 10,362 10,882 21,018 20,698
Interest expense and other 1,410 998 2,855 1,781
-------- -------- -------- --------
Total costs and expenses 36,790 34,437 71,906 68,992
-------- -------- -------- --------
Loss before income taxes (392) (1,793) (3,995) (4,388)
Income tax benefit (provision)
Current (247) (388) (495) (612)
Deferred 80 417 1,398 1,642
-------- -------- -------- --------
Net loss (559) (1,764) (3,092) (3,358)
Preferred stock dividend (437) (437) (875) (875)
-------- -------- -------- --------
Net loss attributable to common stock $ (996) $ (2,201) $ (3,967) $ (4,233)
======== ======== ======== ========
Weighted average number of common
shares outstanding
Basic 29,274 29,259 29,267 29,243
======== ======== ======== ========
Diluted 29,274 29,259 29,267 29,243
======== ======== ======== ========
Net loss per common share
Basic $ (.03) $ (.08) $ (.14) $ (.14)
======== ======== ======== ========
Diluted $ (.03) $ (.08) $ (.14) $ (.14)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months ended
June 30,
----------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,092) $ (3,358)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation, depletion and amortization 21,018 20,698
Gain on sales of assets (723) (2)
Exploration costs 3,246 7,678
Impairments of leasehold costs 1,800 1,715
Deferred taxes (1,398) (1,563)
-------- --------
20,851 25,168
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,428 14,125
Increase in inventories (53) (322)
Increase in other current assets (488) (67)
Decrease in accounts
payable and accrued expenses (1,384) (8,812)
Increase in other assets, net (373) (6,507)
Advances from gas purchasers (11,572) --
-------- --------
Net cash provided by operating activities $ 8,409 $ 23,585
-------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
TOM BROWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months ended
June 30,
-----------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from investing activities:
Capital and exploration expenditures $(23,432) $(56,274)
Changes in accounts payable and accrued
expenses for oil and gas expenditures (3,230) (2,716)
Proceeds from sales of assets 1,158 2,404
-------- --------
Net cash used in investing activities (25,504) (56,586)
-------- --------
Cash flows from financing activities:
Repayments of long-term bank debt (5,000) (53,500)
Repayments of note payable, current -- (5,168)
Borrowings of long-term bank debt 24,000 91,000
Preferred stock dividends (875) (875)
Proceeds from exercise of stock options 962 583
-------- --------
Net cash provided by financing activities 19,087 32,040
-------- --------
Net increase (decrease) in cash and cash
equivalents 1,992 (961)
-------- --------
Cash and cash equivalents at beginning
of period 2,670 6,537
-------- --------
Cash and cash equivalents at end of period $ 4,662 $ 5,576
======== ========
Cash paid during the period for:
Interest $ 1,947 $ 1,427
Taxes 495 612
</TABLE>
See accompanying notes to consolidated financial statements
8
<PAGE> 9
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have
been prepared by Tom Brown, Inc. (the "Company") and are unaudited, except for
the balance sheet at December 31, 1998 which has been prepared from the audited
financial statements at that date. The financial statements reflect necessary
adjustments, all of which were of a recurring nature, and are, in the opinion of
management, necessary for a fair presentation. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The Company
believes that the disclosures presented are adequate to allow the information
presented not to be misleading. Users of financial information produced for
interim periods are encouraged to refer to the footnotes contained in the Annual
Report to Stockholders when reviewing interim financial results. Certain
reclassifications have been made to amounts reported in previous periods to
conform to the current presentation.
(2) ACQUISITIONS AND DIVESTITURES
Acquisition of Sauer Drilling Company
In January 1998, the Company completed the acquisition of W. E. Sauer
Companies L.L.C. of Casper, Wyoming for approximately $8.1 million. The assets
purchased include five drilling rigs, tubular goods, a yard and related assets.
The Company operates the assets under the name Sauer Drilling Company and serves
the drilling needs of operators in the central Rocky Mountain region in addition
to drilling for the Company.
Acquisition of Unocal Corporation Rocky Mountain Assets
In July 1999, the Company completed the acquisition of most of the
Rocky Mountain gas and oil assets of Spirit Energy 76, Unocal Corporation's
lower 48 exploration and production unit for a consideration of 5.8 million
shares of the Company's common stock and $5 million. The effective date of the
transaction was January 1, 1999. The purchase price was adjusted for the net
operating results of the acquired properties since the effective date, which
resulted in a net cash payment to the Company. Included in the acquisition is
the Lisbon Plant, a modern sophisticated cryogenic (60 million cubic feet per
day capacity) natural gas processing plant that extracts natural gas liquids and
merchantable helium; and separates carbon dioxide, hydrogen sulfide and nitrogen
from the raw gas stream. The average net sales from the acquired properties for
1998 was approximately 18 million cubic feet per day of natural gas, 290 barrels
of oil per day and 92,000 gallons of gas plant liquids per day, or approximately
33 million cubic feet equivalent per day (assuming gas plant liquids and oil
converted at 6:1). The net proved reserves of these acquired properties are
estimated to be 89 billion cubic feet equivalent of gas as of the acquisition
effective date. Approximately 65,000 net undeveloped acres were also acquired.
(3) DEBT
In April 1998, the Company repaid and cancelled its $125 million
revolving credit facility and entered into a new $75 million credit facility
(the New Credit Facility) that matures in April 2001. In October 1998, the
Company amended the New Credit Facility by increasing the total commitment to
$100 million. The New Credit Facility has a current borrowing base of $130
million. The amount of the borrowing base may be redetermined as of December 31
and June 30 of each calendar year at the sole discretion of the lender.
Borrowings under the New Credit Facility are unsecured and bear interest, at the
election of the Company, at a rate equal to (i) the greater of the agent bank's
prime rate or the federal funds effective rate plus an applicable margin or (ii)
the agent bank's Eurodollar rate plus an applicable margin. The New Credit
Facility contains certain financial covenants among other restrictions. At June
30, 1999, the outstanding balance was $74 million at an average interest rate of
6.0% and $26 million was available for borrowing under the New Credit Facility.
9
<PAGE> 10
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
At June 30, 1999, standby letters of credit of approximately $532,000
had been issued as security by a surety company for two oil and gas performance
bonds issued to agencies of the U.S. Government. The bonds will remain in place
until released by the government agencies. Another agreement and the related
letter of credit of approximately $1,656,000 expired on April 1, 1999.
(4) INCOME TAXES
The Company has not paid Federal income taxes due to its net operating
loss carryforward, but is required to pay alternative minimum tax ("AMT"). This
tax can be partially offset by an AMT net operating loss carryforward.
Temporary differences and carryforwards which gave rise to significant
portions of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards $ 19,697 $ 10,950
Gas and oil acquisition, exploration and development
costs deducted for tax purposes under book 2,572 6,254
Advances from gas purchasers 4,535 8,585
AMT credit carryforwards 4,499 4,119
Investment tax credit carryforwards 489 857
Option plan compensation 1,559 1,559
Other 2,268 2,265
-------- --------
Net deferred tax asset 35,619 34,589
Valuation allowance (2,207) (2,575)
-------- --------
Recognized net deferred tax asset $ 33,412 $ 32,014
======== ========
</TABLE>
Net deferred tax assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(in thousands)
<S> <C> <C>
Current $ 4,535 $ 8,585
Long-term 28,877 23,429
------- -------
$33,412 $32,014
======= =======
</TABLE>
10
<PAGE> 11
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A valuation allowance of approximately $2.2 million and $2.6 million
at June 30, 1999 and December 31, 1998, respectively, has been provided against
the Company's net deferred tax assets based on management's estimate of the
recoverability of future tax benefits. The Company evaluated all appropriate
factors to determine the proper valuation allowance for carryforwards, including
any limitations concerning their use, the year the carryforward expires, the
levels of taxable income necessary for utilization and tax planning. In this
regard, full valuation allowances were provided for investment tax credit
carryforwards and option plan compensation. Based on its recent operating
results and its expected levels of future earnings, the Company believes it
will, more likely than not, generate sufficient taxable income to realize the
benefit attributable to the net operating loss carryforward and other deferred
tax assets for which valuation allowances were not provided.
At June 30, 1999, the Company had investment tax credit carryforwards
of approximately $.5 million and net operating loss carryforwards of
approximately $56.3 million. The Company has no current liability for Federal
income taxes because of these net operating loss and investment tax credit
carryforwards. Realization of the benefits of these carryforwards is dependent
upon the Company's ability to generate taxable earnings in future periods. In
addition, the availability of these carryforwards is subject to various
limitations. The net operating loss carryforwards expire as follows: $17.6
million in 2000, $7.8 million in 2001, $.7 million in 2002, $2.9 million in
2003, $2.3 million in 2004, and $25.0 million in 2020. Additionally, the Company
has approximately $6.3 million of statutory depletion carryforwards and $4.4
million of AMT credit carryforwards that may be carried forward until utilized.
(5) SEGMENT INFORMATION
The Company operates in three reportable segments: (i) gas and oil
exploration and development, (ii) marketing, gathering and processing and (iii)
drilling. The following tables present information related to these segments.
<TABLE>
<CAPTION>
Six months ended
June 30, 1999
-----------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 31,249 $ 29,948 $ 2,150 $ 63,347
Intersegment revenues 8,298 -- 2,056 10,354
Segment profit (loss) 984 (1,954) 106 (864)
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30, 1998
-----------------------------------------------------
Gas & Oil Marketing,
Exploration & Gathering & Total
Development Processing Drilling Segments
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
Revenues from external purchasers $ 32,254 $ 25,657 $ 1,836 $ 59,747
Intersegment revenues 8,831 - 1,916 10,747
Segment profit (loss) (2,050) (698) (437) (93,185)
</TABLE>
11
<PAGE> 12
TOM BROWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues
Revenues from external purchasers $ 63,347 $ 59,747
Intersegment revenues 10,354 10,747
Intercompany eliminations (5,790) (5,890)
-------- --------
Total consolidated revenues $ 67,911 $ 64,604
======== ========
Profit or (loss)
Total reportable segment loss $ (864) $ (3,185)
Interest expense (2,855) (1,781)
Elimination and other (276) 578
-------- --------
Loss before income taxes $ (3,995) $ (4,388)
======== ========
</TABLE>
12
<PAGE> 13
TOM BROWN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues
During the three month period ended June 30, 1999, revenues from gas
production decreased 3% to $17.3 million while revenues from oil production
increased 11% to $3.5 million. Such decrease in gas revenues was the result of
a decrease in (i) natural gas sales volumes of 3% which decreased revenues by
approximately $.4 million and (ii) average natural gas sales prices received by
the Company from $1.93 to $1.91 per Mcf which decreased revenues by
approximately $.2 million. Revenues from oil production increased as a result
of an increase in average crude oil sales prices from $11.78 to $16.12 per
barrel which increased revenues by approximately $1.2 million. However, this
increase was partially offset by a reduction in oil sales volumes of 19% which
decreased revenues by approximately $.8 million.
During the six month period ended June 30, 1999, revenues from natural
gas and oil production decreased $2.3 million to $38.4 million compared to the
same period in 1998. Such decrease in gas and oil revenue was the result of a
decrease in (i) average natural gas sales prices received by the Company from
$1.94 to $1.77 per Mcf which decreased revenues by approximately $3.0 million
and (ii) oil sales volumes of 11% which decreased revenues by approximately $.8
million. These decreases were partially offset by increases in (i) natural gas
sales volumes of 4% which increased revenues by approximately $1.1 million and
(ii) average crude oil sales prices from $12.34 to $13.12 per barrel which
increased revenues by approximately $.4 million.
Marketing, gathering and processing revenues increased $3.1 million and
$4.5 million, respectively, for the three and six month periods ended June 30,
1999. The increase is a result of increased activity in the Company's natural
gas marketing operations through Wildhorse, a joint venture with KN Energy,
Inc. The gross margin from these activities decreased, however, during these
periods, due to reduced marketing price spreads and lower natural gas liquids
prices.
Drilling operations are conducted through Sauer Drilling Company, which
was acquired in January 1998. Drilling revenues increased $.5 million and $.3
million, respectively for the three and six month periods ended June 30, 1999
as a result of increased utilization of the Company's rigs. Drilling revenues
compared to cost of drilling operations netted a gross margin for the three and
six months ended June 30, 1999 of approximately $.2 million and $.3 million,
respectively.
13
<PAGE> 14
Selected Operating Data
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues (in thousands):
Natural gas sales $ 17,292 $ 17,918 $ 32,251 $ 34,154
Crude oil sales 3,546 3,181 6,166 6,538
Marketing, gathering and processing 13,705 10,634 26,178 21,646
Drilling 1,096 642 2,152 1,836
Other 759 269 1,164 430
-------- -------- -------- --------
Total revenues $ 36,398 $ 32,644 $ 67,911 $ 64,604
======== ======== ======== ========
Net loss attributable to common
stock, (in thousands) $ (913) $ (2,201) $ (3,884) $ (4,233)
======== ======== ======== ========
Natural gas production (MMcf) 9,046 9,285 18,218 17,588
Crude oil production (MBbls) 220 270 470 530
Average natural gas sales price ($/Mcf) $ 1.91 $ 1.93 $ 1.77 $ 1.94
Average crude oil sales price ($/Bbl) $ 16.12 $ 11.78 $ 13.12 $ 12.34
</TABLE>
Costs and Expenses
Costs and expenses for the three months ended June 30, 1999 increased
approximately 7% to $36.8 million as compared to the same period in 1998. Cost
of gas sold increased $3.7 million as a result of increased activity in the
Company's natural gas marketing operations. This increase was partially offset
by a reduction in transportation charges accrued pursuant to a FERC rate ruling
relative to one of the pipelines. Exploration costs decreased $2.8 million due
to a lesser amount of exploratory drilling and seismic activity in the second
quarter of 1999. General and administrative expenses increased $1.0 million due
to severance compensation payments due to the transfer of the Company's
headquarters to Denver, Colorado. Depreciation, depletion and amortization
decreased $.5 million due to a lower rate charged for gas and oil volumes
produced in the second quarter of 1999 as compared to the rate used for the same
period of 1998. The lower rate was the result of the impairment of long lived
asset charge in the fourth quarter of 1998 and to a lesser extent, improved
drilling results experienced in the second quarter of 1999. Interest expense
increased $.4 million due to activity associated with prepaid gas contracts
entered into in the fourth quarter of 1998 and higher debt levels in the second
quarter of 1999.
Cost and expenses for the six months ended June 30, 1999, increased 4% to
$71.9 million as compared to the same period in 1998. Cost of gas sold increased
$5.3 million as a result of increased activity in the Company's natural gas
marketing operations. This increase was partially offset by a reduction in
transportation charges accrued pursuant to a FERC rate ruling relative to one of
the pipelines. Exploration costs decreased $4.4 million due to a lesser amount
of exploratory drilling and seismic activity during 1999. Depreciation,
depletion and amortization increased $.3 million due to higher gas and oil
volumes produced in the first half of 1999 and to a lesser extent by a rate
increase on one of the Company's storage facilities. Interest expense increased
$1.1 million due to activity associated with prepaid gas contracts entered into
in the fourth quarter of 1998 and higher debt levels for 1999.
A valuation allowance of approximately $2.2 million at June 30, 1999 has
been provided against the Company's net deferred tax assets based on
management's estimate of the recoverability of future tax benefits. The Company
evaluated all appropriate factors to determine the proper valuation allowance
for these carryforwards, including any limitations concerning their use, the
year the carryforwards expire and the levels of taxable income necessary for
utilization and tax planning. In this regard, full valuation allowances were
provided for investment tax credit carryforwards. Based on its expected levels
of future earnings, the Company believes it will, more likely than not, generate
sufficient taxable income to realize the benefit attributable to the net
operating loss carryforwards for which valuation allowances were not provided.
14
<PAGE> 15
CAPITAL RESOURCES AND LIQUIDITY
Growth and Acquisitions
Most of the growth of the Company has resulted from recent acquisitions
and, to a lesser extent, from the Company's successful development drilling. The
Company continues to pursue opportunities which will add value by increasing its
reserve base and presence in significant natural gas areas, and further
developing the Company's ability to control and market the production of natural
gas. As the Company continues to evaluate potential acquisitions and property
development opportunities, it will benefit from its financing flexibility and
the leverage potential of the Company's overall capital structure.
Capital Expenditures
The Company's capital and exploration expenditures for the three and six
month periods ended June 30, 1999 were approximately $13.6 million and $23.4
million as compared to $17.2 million and $56.3 million in the same period in
1998. The Company acquired Sauer Drilling Company for $8.1 million in 1998 and
reduced its drilling and seismic programs for 1999.
The Company has historically funded capital expenditures and working
capital requirements with internally generated cash and borrowings. During the
six months ended June 30, 1999, net cash provided by operating activities was
$8.4 million as compared to $23.6 million for the same period of 1998. The
decrease in 1999 was due primarily to the decrease in advances from gas
purchasers and to lower commodity prices and the related affects on individual
components of working capital.
Bank Credit Facility
The Company's Credit Facility provides for a $100 million revolving
line of credit with a current borrowing base of $130 million. The amount of the
borrowing base may be redetermined as of December 31 and June 30 of each
calendar year at the sole discretion of the lender.
At June 30, 1999, the aggregate outstanding balance under the Credit
Facility was $74 million, bearing interest at approximately 6.0% per annum. The
amount available for borrowing under the Credit Facility at June 30, 1999 was
$26 million. The Credit Facility contains certain financial covenants which
require the Company to maintain a minimum consolidated tangible net worth as
well as certain financial ratios. The Company was in compliance with the
covenants contained in the Credit Facility, as amended, at June 30, 1999.
Markets and Prices
Wildhorse Energy Partners, L.L.C. ("Wildhorse"), which was created to
provide gathering, processing, marketing, storage and field services to Rocky
Mountain gas and oil producers, will continue to pursue the construction or
acquisition of gathering, processing and storage areas of the Rocky Mountain
region. During the six months ended June 30,1999, the Company's share of
Wildhorse's investments was approximately $1.8 million for gas gathering and
processing assets. The Company (45 percent) and KNE (55 percent) jointly own
Wildhorse. Wildhorse is operated by KNE under the direction of an operating team
with equal representation from KNE and the Company.
The Company has dedicated significant amounts of its Rocky Mountain gas
production to Wildhorse for gathering, processing and marketing.
The Company's revenues and associated cash flows are significantly
impacted by changes in gas and oil prices. Substantially all of the Company's
gas and oil production is currently market sensitive. During the first six
months of 1999, the average prices received for gas and oil by the Company were
$1.77 per Mcf and $13.12 per barrel, respectively, as compared to $1.94 Mcf and
$12.34 per barrel for the same period in 1998.
15
<PAGE> 16
Year 2000
Year 2000 Issue. Many computer software systems were structured to use
a two-digit date field meaning that they will not be able to properly recognize
dates in the Year 2000. As a result, computer systems and software may need to
be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists concerning the potential effects associated with such
compliance as systems that do not properly recognize such information could
generate erroneous data or cause a system to fail.
Compliance Program. In order to address the Year 2000 issue, the
Company appointed the Computer Information Systems department to assure that key
automated systems and related processors would remain functional through year
2000. The department addressed the project by reviewing the information
technology ("IT") and non-information technology systems to determine whether
they were Year 2000 compliant. Also, the department prepared a formal
questionnaire for all significant suppliers, customers, and service providers to
determine the extent to which the Company was vulnerable to those third parties'
failure to remediate the Year 2000 problem.
Company State of Readiness. A review and assessment of the information
technology and non-information technology systems was completed as of December
31, 1998 and did not identify any material systems which are not Year 2000
compliant. In addition, the Company has received written assurances of Year 2000
compliance from approximately 81% of its operators and purchasers and 65% of its
vendors. The operators and purchasers who responded as being Year 2000 compliant
represented 96% of the total dollar amount from that source to the Company and
the vendors who responded as being Year 2000 compliant represent 70%. The third
party confirmation process is still ongoing. The Company believes that any
disruption caused from a third party's inability to be Year 2000 compliant will
not be material to its operations, although there can be no assurances.
Cost to Address Year 2000 Compliance Issues. The Company believes that
it will not be required to make any material expenditures to address the Year
2000 problem as it relates to its existing systems. To date, costs incurred to
address Year 2000 compliance have been internal in nature and have been charged
to expense as incurred. Such costs have been funded from cash provided by
operating activities. However, uncertainty exists concerning the potential costs
and effects associated with any Year 2000 compliance, and the Company intends to
continue to make efforts to ensure that third parties with whom it has
relationships are Year 2000 compliant. The Computer Information Systems
department is not aware of any IT projects that have been delayed due to the
Year 2000 compliance program.
Risk of Non-Compliance and Contingency Plan. The goal of the Year 2000
project has been to ensure that all of the critical systems and processes which
are under the direct control of the Company remain functional. However, because
certain systems and processes may be interrelated with systems outside of the
control of the Company, there can be no assurance that all implementations will
be successful. The principal area of risk to the Company is thought to be gas
measurement control systems of pipeline volumes provided by third parties. A
likely worst case scenario is that despite the Company's efforts, there could be
failures of such systems which might cause disruption to the natural gas
delivery process. However, the Company believes that the risk of such occurrence
is low based upon its review and confirmation efforts concerning Year 2000
compliance with third party pipelines. Accordingly, as part of the Year 2000
project, contingency plans will be developed to respond to any potential
failures as they may be identified. Therefore, there can be no assurance that
unexpected Year 2000 compliance problems of either the Company or its vendors,
customers and service providers would not materially and adversely affect the
Company's business, financial condition or operating results. The Company will
continue throughout 1999 to consider the likelihood of a material business
interruption due to the Year 2000 issue.
16
<PAGE> 17
Forward-Looking Statements and Risk
Certain statements in this report, including statements of the future
plans, objectives, and expected performance of the Company, are forward-looking
statements that are dependent on certain events, risks and uncertainties that
may be outside the Company's control which could cause actual results to differ
materially from those anticipated. Some of these include, but are not limited
to, economic and competitive conditions, inflation rates, legislative and
regulatory changes, financial market conditions, political and economic
uncertainties, future business decisions, and other uncertainties, all of which
are difficult to predict.
There are numerous uncertainties inherent in estimating quantities of
proven gas and oil reserves and in projecting future rates of production and
timing of development expenditures. The total amount or timing of actual future
production may vary significantly from reserves and production estimates. The
drilling of exploratory wells can involve significant risks including those
related to timing, success rates and cost overruns. Lease and rig availability,
complex geology and other factors can affect these risks. Future gas and oil
prices also could affect results of operations and cash flows.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000, as amended by SFAS No. 137, and cannot be applied
retroactively. SFAS No. 133 must be applied to derivative instruments that were
issued, acquired, or substantially modified after December 31, 1997. The Company
is evaluating SFAS No. 133 and has not yet quantified the impact adopting the
Statement will have on its financial statements. However, SFAS No. 133 could
increase volatility in earnings and other comprehensive income (stockholders'
equity) should the Company enter into transactions covered by the pronouncement.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP provides
guidance with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. The Company
adopted SOP 98-1 in the first quarter of 1999. The adoption did not have a
significant effect on the Company's consolidated financial statements.
17
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company utilizes various financial instruments which inherently
have some degree of market risk. The primary sources of market risk include
fluctuations in commodity prices and interest rate fluctuations.
Price Fluctuations
The Company's results of operations are highly dependent upon the
prices received for oil and natural gas production. Accordingly, in order to
increase the financial flexibility and to protect the Company against commodity
price fluctuations, the Company may, from time to time in the ordinary course of
business, enter into non-speculative hedge arrangements, commodity swap
agreements, forward sale contracts, commodity futures, options and other similar
agreements relating to natural gas and crude oil.
In 1998, in connection with advance payments for future natural gas
deliveries, the Company entered into three gas price swap contracts with third
parties under which the Company became a fixed price payor for 35,000 Mmbtu per
day for a twelve month period commencing January 1999 at a weighted average
price of $2.02 per Mmbtu. At June 30, 1999, the estimated fair value of the open
gas price swap contracts was an unrealized gain of approximately $1,698,000.
Interest Rate Risk
At June 30, 1999, the Company had $74 million outstanding under its
credit facility at an average interest rate of 6.0%. Borrowings under the
Company's credit facility bear interest, at the election of the Company, at (i)
the greater of the agent bank's prime rate or the federal funds effective rate,
plus an applicable margin or (ii) the agent bank's Eurodollar rate, plus an
applicable margin. As a result, the Company's annual interest cost in 1999 will
fluctuate based on short-term interest rates. Assuming no change in the amount
outstanding during 1999, the impact on interest expense of a ten percent change
in the average interest rate would be approximately $444,000. As the interest
rate is variable and is reflective of current market conditions, the carrying
value approximates the fair value.
18
<PAGE> 19
TOM BROWN, INC.
P. O. Box 2608
500 Empire Plaza Bldg.
Midland, Texas 79701
--------------------------
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FORM 10-Q
--------------------------
PART II OF TWO PARTS
OTHER INFORMATION
19
<PAGE> 20
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 20, 1999.
At the meeting, the following persons were elected to serve as Directors of the
Company until the 2000 annual meeting of stockholders and until their respective
successors are duly qualified and elected: (1) Thomas C. Brown, (2) Donald L.
Evans, (3) Henry Groppe, (4) Edward W. LeBaron, Jr. (5) James B. Wallace, (6)
Robert H. Whilden, Jr., (7) David M. Carmichael, and (8) Clyde McKenzie.
Set forth below is a tabulation of votes with respect to each nominee
for Director:
<TABLE>
<CAPTION>
Votes Votes Broker
Cast for Witheld Non-votes
-------- ------- ---------
<S> <C> <C> <C>
Thomas C. Brown 28,422,026 84,371 -0-
Donald D. Evans 28,419,601 86,796 -0-
Henry Groppe 28,421,926 84,471 -0-
Edward W. LeBaron, Jr. 28,421,781 84,616 -0-
James B. Wallace 28,422,226 84,171 -0-
Robert H. Whilden, Jr. 28,421,876 84,521 -0-
</TABLE>
In addition to the above directors elected by the holders of the Common
Stock, the sole holder of the Company's 1,000,000 shares of outstanding
Preferred Stock also designated David M. Carmichael and Clyde McKenzie as
directors.
20
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A
(a) Exhibit No. Description
10.1* Third Amendment, dated June 25, 1999, to the
Credit Agreement, dated April 17, 1998.
10.2* Amended Schedule to Severance Agreement filed as
Exhibit No. 10.1 to the Registrant's Form 10-Q
Report dated June 30, 1998 and filed with the
Securities and Exchange Commission on August 12,
1998 identifying officers and executives of the
Registrant who are parties thereto and the multiple
of earnings payable to each officer or executive
upon termination resulting from certain change in
control events.
10.3* Employment Agreement dated May 3, 1999 between the
Registrant and James D. Lightner.
10.4* Amended and Restated 1993 Stock Option Plan.
27* Financial Data Schedule
- -------------------------
* Filed herewith
(b) Reports on Form 8-K
In its Form 8-K Report dated July 2, 1999 the Company reported
under Item 2., Acquisition or Disposition of Assets that it
completed the acquisition from Union Oil Company of California
("Unocal') certain oil and gas interests and properties located in
the states of Colorado, Wyoming, North Dakota and Utah, a gas
processing plant in San Juan County, Utah and an approximate 66
mile 10 inch pipeline from the gas processing plant to Aneth,
Utah. Approximately 65,000 net undeveloped acres located primarily
in the states of Colorado, Wyoming and Utah were also acquired.
The consideration for the properties was paid in the form of
5,800,000 shares of the Company's common stock and $5 million in
cash. The effective date of the transaction was January 1, 1999,
which resulted in a net cash payment to the Company, reflecting
the net operating results of the Unocal properties since the
effective date.
21
<PAGE> 22
TOM BROWN, INC. AND SUBSIDIARIES
OTHER INFORMATION
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOM BROWN, INC.
--------------------------------------
(Registrant)
/s/ Daniel G. Blanchard
--------------------------------------
Daniel G. Blanchard
Chief Financial Officer
August 10, 1999 s/ R. Kim Harris
- --------------- --------------------------------------
Date R. Kim Harris
Controller
(Mr. Harris is the Vice President of
Finance and Controller and is duly
authorized to sign on behalf
of the Registrant)
22
<PAGE> 23
EXHIBIT INDEX
Exhibit No. Description
10.1* Third Amendment, dated June 25, 1999, to the
Credit Agreement, dated April 17, 1998.
10.2* Amended Schedule to Severance Agreement filed as
Exhibit No. 10.1 to the Registrant's Form 10-Q
Report dated June 30, 1998 and filed with the
Securities and Exchange Commission on August 12,
1998 identifying officers and executives of the
Registrant who are parties thereto and the multiple
of earnings payable to each officer or executive
upon termination resulting from certain change in
control events.
10.3* Employment Agreement dated May 3, 1999 between the
Registrant and James D. Lightner.
10.4* Amended and Restated 1993 Stock Option Plan.
27* Financial Data Schedule
- -------------------------
* Filed herewith
<PAGE> 1
Exhibit 10.1
THIRD AMENDMENT, dated as of June 25, 1999 (this "Amendment"), to the
Credit Agreement, dated as of April 17, 1998 (as amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"), among Tom Brown,
Inc., a Delaware corporation (the "Borrower"), the several banks and other
financial institutions from time to time parties thereto (the "Lenders") and
The Chase Manhattan Bank, a New York banking corporation, as administrative
agent for the Lenders thereunder (in such capacity, the "Agent").
WITNESSETH:
WHEREAS, the Borrower, the Lenders and the Agent are parties to the
Credit Agreement; and
WHEREAS, the Borrower has requested that the Lenders agree to amend
certain provisions of the Credit Agreement, and, upon this Amendment becoming
effective, the Lenders have agreed to such amendment upon the terms and subject
to the conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower, the Agent and the Lenders hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise
defined shall have the respective meanings set forth in the Credit Agreement.
2. Amendment to Subsection 6.4(b). Subsection 6.4(b) of the Credit
Agreement is hereby amended by deleting the number "5,000,000" and substituting
in lieu thereof "15,000,000".
3. Amendment to Subsection 6.8. (a) Subsection 6.8(d) of the Credit
Agreement is hereby amended by deleting the word "and" at the end such
subsection.
(b) Subsection 6.8(e) of the Credit Agreement is hereby amended by
deleting the period at the end of such subsection and substituting in lieu
thereof "and".
(c) Subsection 6.8 of the Credit Agreement is hereby amended by
adding the following new paragraph (f) to the end of such subsection:
(f) the purchase by the Borrower of oil and gas assets of Union Oil
Company of California ("Unocal") for 5,800,000 shares of common stock
of the Borrower and $5,000,000 cash, the capital contribution by the
Borrower to Borrower's wholly-owned subsidiary, TBI Pipeline Company
("New Subsidiary"), of the Aneth oil pipeline located in the state of
Utah in connection with Unocal asset acquisition and investments by the
Borrower in New Subsidiary not exceeding $200,000 on an annual basis.
<PAGE> 2
4. Effectiveness. This Amendment shall become effective on the date
(the "Amendment Effective Date") that Agent shall have received this Amendment
executed and delivered by the Borrower and the Required Lenders, and
acknowledged and consented to by each Subsidiary Guarantor.
5. Representations and Warranties. After giving effect to this
Amendment , on the Amendment Effective Date, the Borrower hereby confirms,
reaffirms and restates the representations and warranties set forth in Section
3 of the Credit Agreement.
6. Miscellaneous. (a) Except as otherwise expressly modified by this
Amendment, the Credit Agreement is and shall continue to be in full force and
effect in accordance with its terms.
(b) The Borrower shall pay the reasonable fees and disbursements of
counsel to the Agent incurred in connection with this Amendment.
(c) This Amendment may be executed by the parties hereto on one or
more counterparts, and all of such counterparts shall be deemed to constitute
one and the same instrument. This Amendment may be delivered by facsimile
transmission of the relevant signature pages hereof.
(d) THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their duly authorized officers on the date first
above written.
TOM BROWN, INC.
By: /s/ JACK F. HARPER
----------------------------------
Name: Jack F. Harper
Title: Treasurer
THE CHASE MANHATTAN BANK,
as Agent and as a Lender
By: /s/ PETER M. LING
----------------------------------
Name: Peter M. Ling
Title: Vice President
NATIONSBANK, N.A., as successor in merger
with NationsBank of Texas, N.A.,
as Co-Agent and as a Lender
By: /s/ DALE T. WILSON
-----------------------------------
Name: Dale T. Wilson
Title: Managing Director
U.S. BANK NATIONAL ASSOCIATION,
as a Lender
By: /s/ CHARLES S. SEARLE
-----------------------------------
Name: Charles S. Searle
Title: Senior Vice President
<PAGE> 4
The undersigned do hereby acknowledge
and consent to the terms and conditions
of the foregoing Amendment.
TBI WEST VIRGINIA INC.
By: /s/ BRUCE R. DEBORE
----------------------
Title: Bruce R. DeBoer
<PAGE> 1
Exhibit 10.2
<TABLE>
<CAPTION>
Severance Agreements
Officer or Executive Multiple
-------------------- --------
<S> <C>
Donald L. Evans 2.5
James D. Lightner 2.5
Thomas W. Dyk 2
Peter R. Scherer 2
Bruce R. DeBoer 2
Daniel G. Blanchard 2
Jack F. Harper 2
R. Kim Harris 2
B. Jack Reed 2
Clifford C. Drescher 2
</TABLE>
<PAGE> 1
Exhibit 10.3
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is dated as of May 3, 1999
and made by and between TOM BROWN, INC., a Delaware corporation (the
"Company"), having its principal offices at 555 17th Street, Suite 1850,
Denver, Colorado 80202, and JAMES D. LIGHTNER (the "Employee"), an individual
residing at 4503 W. Wagon Trail Drive, Littleton, Colorado 80123.
W I T N E S S E T H :
NOW, THEREFORE, in consideration of the premises and the other mutual
covenants contained herein, the Company and Employee hereby agree as follows:
1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby agrees to render his exclusive service to the Company, in the
capacity of President of the Company, with such duties as may be assigned to
him from time to time by the Board of Directors of the Company (the "Board")
for the period commencing on the date hereof and ending on April 30, 2002 (the
"Employment Period"), subject to earlier termination as hereinafter provided.
2. Place of Employment. Unless otherwise agreed by the Company and
Employee, throughout the Employment Period of this Agreement, Employee's
business office shall be located in Denver, Colorado, at such location in the
Denver metropolitan area as may be specified by the Board.
3. Compensation. Upon execution of this Agreement, the Company shall
pay to Employee a lump sum cash payment of One Hundred Thousand and No/100
Dollars ($100,000). Additionally, Employee shall be compensated by the Company
at a minimum base rate of Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00) per annum, payable semi-monthly on the fifteenth and final days
of each month during the Employment Period, subject to such increases and
additional payments as may be determined from time to time by the Board in its
sole discretion. Such compensation shall be in addition to any group insurance,
pension, profit sharing and other employee benefits, including the Company's
existing employee benefit plans, which are extended from time to time to
Employee in the discretion of the Board and for which Employee is eligible.
Subject to such rules and procedures as are from time to time specified by the
Company, the Company shall also reimburse Employee for all reasonable expenses
incurred by him on behalf of the Company.
4. Performance of Services. Employee shall devote his full working time
to the business of the Company; provided, however, Employee shall be excused
from performing any services for the Company hereunder during periods of
temporary incapacity and during vacations conforming to the Company's standard
vacation policy (which for Employee shall be a minimum of four weeks per year),
without thereby in any way affecting the compensation to which he is entitled
hereunder.
<PAGE> 2
5. Noncompetition. Employee agrees that during his employment by the
Company and for so long thereafter as he is receiving Severance Benefit
Payments (as such term is defined in Section 10), he will not, directly or
indirectly, either through any kind of ownership (other than ownership of
securities of publicly held corporations of which Employee owns less than one
percent (1%) of any class of outstanding securities) or as a director, officer,
agent, employee or consultant, engage in any business which is competitive with
the business of the Company within the states of Texas, Wyoming, Utah,
Colorado, New Mexico, Montana or North Dakota. It is expressly agreed that the
remedy at law for breach of this covenant is inadequate and that injunctive
relief shall be available to prevent the breach thereof. Employee shall be
relieved from the restrictions of this Section 5 only in the event Employee is
terminated due to Trigger Events in accordance with the Severance Agreement (as
defined in Section 20).
6. Continuing Obligations. In order to induce the Company to enter into
this Agreement, the Employee hereby agrees that all documents, records,
techniques, business secrets and other information which have come into his
possession from time to time during his employment by the Company or which may
come into his possession during his employment hereunder, shall be deemed to be
confidential and proprietary to the Company and the Employee further agrees to
retain in confidence any confidential information known to him concerning the
Company and its subsidiaries and their respective businesses so long as such
information is not publicly disclosed; provided, however, that the express
obligation to retain such confidence shall expire eighteen (18) months after
Employee's termination of employment. In the event of a breach or threatened
breach by the Employee of the provision of this Section 6, the Company shall,
in addition to any other available remedies, be entitled to an injunction
restraining Employee from disclosing, in whole or in part, any such information
or from rendering any services to any person, firm or corporation to whom any
of such information may have been disclosed or is threatened to be disclosed.
7. Property of Company. All data, drawings and other records and
written material prepared or compiled by Employee or furnished to Employee
while in the employ of the Company shall be the sole and exclusive property of
the Company, and none of such data, drawings or other records, or copies
thereof, shall be retained by Employee upon termination of his employment.
8. Surviving Provisions. The provisions of Sections 5 (for so long as
the Employee is receiving Severance Benefit Payments), 6 and 7 of this
Agreement shall continue to be binding upon Employee in accordance with their
terms, notwithstanding termination of Employee's employment hereunder for any
reason.
9. Termination for Cause. It is agreed and understood that the Company
can terminate the employment of the Employee under this Agreement without
obligation to pay the Severance Benefit Payment (as described below) if such
termination is for cause, and that, without prejudice to the generality of the
right to terminate for cause, each of the following contingencies shall be
examples of cause:
-2-
<PAGE> 3
(i) conviction of a felony or a misdemeanor involving moral turpitude,
(ii) failure to perform his duties or responsibilities in a manner
satisfactory to the Company, (iii) engagement in conduct which is
injurious (monetarily or otherwise) to the Company or any of its
affiliates (including, without limitation, misuse of the Company's or
an affiliate's funds or other property), (iv) engagement in business
activities which are in conflict with the business interests of the
Company, (v) insubordination or (vi) engagement in conduct which is in
violation of the Company's safety rules or standards or which otherwise
causes injury to another employee or any other person (collectively,
termination for "cause"); provided, however, that if the Board
determines, in the reasonable exercise of its discretion and business
judgment, the matter is such that it may be cured by the employee, the
Board shall provide written notice specifying the matters constituting
cause for dismissal as well as the manner in which the matters shall be
cured, and the employee shall be given 30 days to correct the matters
in a manner satisfactory to the Board.
The Company may for cause terminate Employee's employment under this
Agreement without advance notice, except as otherwise specifically provided for
in respect of cureable situations. Termination shall not affect any of the
Company's other rights and remedies.
10. Severance Benefit Payment. The Company shall provide Employee with
a severance benefit payment in an amount equal to the Employee's then existing
annual base pay (or an amount equal to the Employee's base pay for the balance
of the term hereof if less than one year) (the "Severance Benefit Payment")
upon the occurrence of any one of the events specified in subsections (a)
through (d) below and Employee's subsequent resignation from or termination of
employment (each, a "Severance Event"):
(a) Without the express written consent of Employee, the
assignment of Employee to any duties inconsistent with his position,
duties, responsibilities or status with the Company as such exist as of
the date hereof or a reduction of his duties or responsibilities for
reasons other than cause;
(b) Any failure of the Company to obtain the assumption of the
obligation to perform this Agreement by any successor as contemplated
in Section 13 hereof;
(c) Any failure by the Company or its stockholders, as the case
may be, to re-elect the Employee to the corporate office of President,
or upon his removal from any such office for reasons other than cause;
or
(d) Any breach by the Company (or any successor) of any of the
provisions of this Agreement or any failure by the Company to carry out
any of its obligations hereunder for reasons other than cause.
-3-
<PAGE> 4
The Severance Benefit Payment shall be paid to Employee in semi-monthly
installments in the same amounts and at the same times as Employee's base pay
was being paid at the time of the Severance Event, until the full amount of the
Severance Benefit Payment has been paid.
11. Payment of Certain Costs of Employee. If a dispute arises regarding
a termination of the Employee or the interpretation or enforcement of this
Agreement, all legal fees and expenses incurred by the Employee in contesting
or disputing any such termination or seeking to obtain or enforce any right or
benefit provided for in this Agreement or in otherwise pursuing his claim will
be paid by the Company, to the extent the Employee prevails. The Company
further agrees to pay prejudgment interest on any money judgment obtained by
the Employee calculated at the Chase Manhattan Bank prime interest rate in
effect from time to time from the date that payment(s) to him should have been
made under this Agreement.
12. Mitigation. The Employee is not required to mitigate the amount of
any payments to be made by the Company pursuant to this Agreement by seeking
other employment or otherwise.
13. Successors. (a) The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Employee, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Employee to compensation from the Company in the same amount and on the same
terms as the Employee would be entitled hereunder if he were to terminate his
employment pursuant to subsections 10(a), 10(b), 10(c) or 10(d). As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and
any successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 13 or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Employee should
die during the term hereof, the Company shall pay an amount equal to any amounts
then payable to Employee hereunder, plus an amount equal to three months'
salary, with all such amounts to be paid to Employee's devisee, legatee or other
designee or, if there be no designee, to his estate.
14. No Inconsistent Obligation. Employee represents and warrants that
he has not previously assumed any obligations inconsistent with those of this
Agreement.
-4-
<PAGE> 5
15. Modification. This Agreement shall be in addition to all previous
agreements, written or oral, relating to Employee's employment by the Company,
and shall not be changed orally, but only by a written instrument to which the
Company and the Employee are both parties.
16. Binding Effect. This Agreement and the rights and obligations
hereunder shall be binding upon and inure to the benefit of the parties hereto
and their respective legal representatives, and shall also bind and inure to
the benefit of any successor of the Company by merger or consolidation or any
assignee of all or substantially all of its properties.
17. Law Governing. This Agreement is made, accepted and delivered in
Denver, Colorado, is performable in Denver, Colorado, and it shall be construed
and enforced according to the laws of the State of Colorado. Venue shall lie in
the City and County of Denver, Colorado for the purpose of resolving and
enforcing any dispute which may arise under this Agreement and the parties
agree that they will submit themselves to the jurisdiction of the competent
State or Federal Court situated in the City and County of Denver, Colorado.
18. Invalid Provision. In case any one or more of the provisions
contained in this Agreement shall be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be impaired thereby.
19. Notice. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when delivered or mailed by United States registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to Employee:
James D. Lightner
4503 W. Wagon Trail Drive
Littleton, Colorado 80123
If to Company:
Tom Brown, Inc.
555 17th Street
Suite 1850
Denver, Colorado 80202
Attn: General Counsel
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
-5-
<PAGE> 6
20. Effective May 3, 1999, Employee and the Company have entered into
that certain Severance Agreement (the "Severance Agreement") which provides
Employee with compensation in the event of a Change in Control or an Asset
Acquisition (each as defined therein and collectively referred to herein as
"Trigger Events"). Notwithstanding anything to the contrary set forth in this
Agreement, if Employee's employment with the Company is terminated such that
the provisions of the Severance Agreement are applicable to Employee, Employee
shall have the option to accept the greater of the benefits of this Agreement
or the Severance Agreement (which benefits are intended to be mutually
exclusive and not cumulative upon a termination in conjunction with the
occurrence of either of the Trigger Events).
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EMPLOYEE TOM BROWN, INC.
By: /s/ JAMES D. LIGHTNER By: /s/ DONALD L. EVANS
---------------------- ---------------------
James D. Lightner Donald L.Evans
Chief Executive Officer
-6-
<PAGE> 1
Exhibit 10.4
TOM BROWN, INC.
AMENDED AND RESTATED
1993 STOCK OPTION PLAN
I. PURPOSE OF THE PLAN
The Tom Brown, Inc. 1993 Stock Option Plan (the "Plan") is intended to
provide a means whereby certain employees and directors of Tom Brown, Inc., a
Delaware corporation (the "Company"), and its subsidiaries may develop a sense
of proprietorship and personal involvement in the development and financial
success of the Company, and to encourage them to remain with and devote their
best efforts to the business of the Company, thereby advancing the interests of
the Company and its shareholders. Accordingly, the Company may grant to certain
employees and directors ("Optionees") the option ("Option") to purchase shares
of the common stock of the Company ("Stock"), as hereinafter set forth. Options
granted under the Plan shall not be treated as incentive stock options within
the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended
(the "Code").
II. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") appointed
by the Board of Directors of the Company (the "Board"). The Committee shall
have sole authority to select the Optionees from among those individuals
eligible hereunder and to establish the number of shares which may be issued
under each Option. The Committee is authorized to interpret the Plan and may
from time to time adopt such rules and regulations, consistent with the
provisions of the Plan, as it may deem advisable to carry out the Plan. All
decisions made by the Committee in selecting the Optionees, in establishing the
number of shares which may be issued under each Option and in construing the
provisions of the Plan shall be final.
III. OPTION AGREEMENTS
(a) Each Option shall be evidenced by a written agreement between the
Company and the Optionee ("Option Agreement") which shall contain such terms
and conditions as may be approved by the Committee. The terms and conditions of
the respective Option Agreements need not be identical. Specifically, an Option
Agreement may provide for the payment of the option price, in whole or in part,
by the delivery of a number of shares of Stock (plus cash if necessary) having
a fair market value equal to such option price.
<PAGE> 2
(b) Each Option and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution, and
shall be exercisable during the Optionee's lifetime only by the Optionee or the
Optionee's guardian or legal representative.
IV. ELIGIBILITY OF OPTIONEE
Options may be granted only to individuals who are employees or directors
of the Company or any parent or subsidiary corporation (as defined in section
424 of the Code) of the Company at the time the Option is granted. Options may
be granted to the same individual on more than one occasion.
V. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 2,700,000 shares of Stock. Such shares may
consist of authorized but unissued shares of Stock or previously issued shares
of Stock reacquired by the Company. Any of such shares which remain unissued
and which are not subject to outstanding Options at the termination of the Plan
shall cease to be subject to the Plan, but, until termination of the Plan, the
Company shall at all times make available a sufficient number of shares to meet
the requirements of the Plan. Should any Option hereunder expire or terminate
prior to its exercise in full, the shares theretofore subject to such Option
may again be subject to an Option granted under the Plan. The aggregate number
of shares which may be issued under the Plan shall be subject to adjustment in
the same manner as provided in paragraph VIII hereof with respect to shares of
Stock subject to Options then outstanding.
VI. OPTION PRICE
The purchase price of Stock issued under each Option shall be determined
by the Committee, and may be less than the fair market value of Stock subject
to the Option.
VII. TERM OF PLAN
The Plan shall be effective upon the date of its adoption by the Board.
Except with respect to Options then outstanding, if not sooner terminated under
the provisions of Paragraph IX, the Plan shall terminate upon and no further
Options shall be granted after the expiration of ten years from the date of its
adoption by the Board.
-2-
<PAGE> 3
VIII. RECAPITALIZATION OR REORGANIZATION
(a) The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization
or other change in the Company's capital structure or its business, any merger
or consolidation of the Company, any issue of debt or equity securities, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
(b) The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration
of an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an Option theretofore granted the
Optionee shall be entitled to purchase under such Option, in lieu of the number
and class of shares of Stock then covered by such Option, the number and class
of shares of stock and securities to which the Optionee would have been
entitled pursuant to the terms of the recapitalization if, immediately prior to
such recapitalization, the Optionee had been the holder of record of the number
of shares of Stock then covered by such Option. If (i) the Company shall not be
the surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity other than a previously wholly-owned
subsidiary of the Company), (ii) the Company sells, leases or exchanges all or
substantially all of its assets to any other person or entity (other than a
wholly-owned subsidiary of the Company), (iii) the Company is to be dissolved
and liquidated, (iv) any person or entity, including a "group" as contemplated
by Section 13(d)(3) of the Securities Exchange Act of 1934, acquires or gains
ownership or control (including, without limitation, power to vote) of more
than 50% of the outstanding shares of the Company's voting stock (based upon
voting power), or (v) as a result of or in connection with a contested election
of directors, the persons who were directors of the Company before such
election shall cease to constitute a majority of the Board (each such event is
referred to herein as a "Corporate Change"), no later than (a) ten days after
the approval by the shareholders of the Company of such merger, consolidation,
reorganization, sale, lease or exchange of assets or dissolution or such
election of directors or (b) thirty days after a change of control of the type
described
-3-
<PAGE> 4
in clause (iv), the Committee, acting in its sole discretion without the
consent or approval of any Optionee, shall act to effect one or more of the
following alternatives, which may vary among individual Optionees and which may
vary among Options held by any individual Optionee: (1) accelerate the time at
which Options then outstanding may be exercised so that such Options may be
exercised in full for a limited period of time on or before a specified date
(before or after such Corporate Change) fixed by the Committee, after which
specified date all unexercised Options and all rights of Optionees thereunder
shall terminate, (2) require the mandatory surrender to the Company by selected
Optionees of some or all of the outstanding Options held by such Optionees
(irrespective of whether such Options are then exercisable under the provisions
of the Plan) as of a date, before or after such Corporate Change, specified by
the Committee, in which event the Committee shall thereupon cancel such Options
and the Company shall pay to each Optionee an amount of cash per share equal to
the excess, if any, of the amount calculated in Subparagraph (d) below (the
"Change of Control Value") of the shares subject to such Option over the
exercise price(s) under such Options for such shares, (3) make such adjustments
to Options then outstanding as the Committee deems appropriate to reflect such
Corporate Change (provided, however, that the Committee may determine in its
sole discretion that no adjustment is necessary to Options then outstanding) or
(4) provide that thereafter upon any exercise of an Option theretofore granted
the Optionee shall be entitled to purchase under such Option, in lieu of the
number of shares of Stock then covered by such Option the number and class of
shares of stock or other securities or property (including, without limitation,
cash) to which the Optionee would have been entitled pursuant to the terms of
the agreement of merger, consolidation or sale of assets and dissolution if,
immediately prior to such merger, consolidation or sale of assets and
dissolution the Optionee had been the holder of record of the number of shares
of Stock then covered by such Option.
(d) For the purposes of clause (2) in Subparagraph (c) above, the "Change
of Control Value" shall equal the amount determined in clause (i), (ii) or
(iii), whichever is applicable, as follows: (i) the per share price offered to
shareholders of the Company in any such merger, consolidation, reorganization,
sale of assets or dissolution transaction, (ii) the price per share offered to
shareholders of the Company in any tender offer or exchange offer whereby a
Corporate Change takes place, or (iii) if such Corporate Change occurs other
than pursuant to a tender or exchange offer, the fair market value per share of
the shares into which such Options being surrendered are exercisable, as
determined by the Committee as of the date determined by the Committee to be
the date of cancellation and surrender of such Options. In the event that the
consideration offered to shareholders of the Company in any transaction
described in this Subparagraph (d) or Subparagraph (c) above consists of
anything other than cash, the Committee shall determine the fair cash
equivalent of the portion of the consideration offered which is other than
cash.
-4-
<PAGE> 5
(e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be
subject to any required shareholder action.
(f) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number
of shares of Stock subject to Options theretofore granted or the purchase price
per share.
IX. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided, that no change in any Option theretofore granted may be
made which would impair the rights of the Optionee without the consent of such
Optionee.
X. SECURITIES LAWS
The Company shall not be obligated to issue any Stock pursuant to any
Option granted under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of
1933 and such other state and federal laws, rules or regulations as the Company
or the Committee deems applicable and, in the opinion of legal counsel for the
Company, there is no exemption from the registration requirements of such laws,
rules or regulations available for the offering and sale of such shares.
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,662
<SECURITIES> 0
<RECEIVABLES> 30,962
<ALLOWANCES> 0
<INVENTORY> 585
<CURRENT-ASSETS> 41,492
<PP&E> 477,230
<DEPRECIATION> 113,292
<TOTAL-ASSETS> 441,636
<CURRENT-LIABILITIES> 36,221
<BONDS> 74,000
2,934
0
<COMMON> 100
<OTHER-SE> 325,711
<TOTAL-LIABILITY-AND-EQUITY> 441,636
<SALES> 38,417
<TOTAL-REVENUES> 67,911
<CGS> 56,737
<TOTAL-COSTS> 71,906
<OTHER-EXPENSES> 3,908
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,855
<INCOME-PRETAX> (3,995)
<INCOME-TAX> 903
<INCOME-CONTINUING> (3,967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,967)
<EPS-BASIC> (.14)
<EPS-DILUTED> (.14)
</TABLE>
